RHB Group Research is keeping “neutral” on the local telecommunications sector for 2022 and emphasises that stock picking remains key on the back of an uneven economic recovery and extended market volatility.
The RHB research team has estimated a sector valuation of 9.5 times FY2022 EV/EBITDA, which is -1 standard deviation (SD) below its historical mean. This, the research team, believes is fair given the balance of risk and reward coupled with the low base of earnings in 2020 and 2021.
With that, RHB likes Singapore Telecommunications (Singtel) as its preferred exposure within the sector with a 12% ESG premium incorporated – the highest within its Asean-4 telco universe.
“We see a rebound in industry mobile revenue from a low- to mid-single decline in 2021,” says the research team, as it predicts mobile service revenue to recover this year on the back of recovery in roaming and prepaid revenues from easing travel restrictions, and ARPU uplift from 5G services, and notwithstanding concerns over the threat posed by the Omicron variant.
While mobile virtual network operators (MVNO) would continue to pose a threat to the mobile network operators (MNO), the latter’s appeal comes from superior customer service, attractive 5G device bundles and digital plans.
“We expect 5G adoption to ramp-up in 2022 (currently less than 5% of mobile subs are on 5G), with the availability of more mid-priced handsets while the population coverage of the MNOs is well on track to surpass the mandated 50% by end-2022,” says RHB.
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Meanwhile, strong enterprise tailwinds from digitalisation drive and mergers and acquisitions (M&As) are expected to contribute to growth. “We believe the MNOs are well positioned to capitalise on the strong enterprise tailwinds, with multi-year double-digit growth projected. We note the slew of cross-border M&As deals executed in 2020-2021 to strengthen the telcos’ enterprise capabilities, specifically in the areas of cloud and managed services,” says RHB.
To recap, some of the recent acquisitions by local telcos that could contribute to growth include StarHub’s acquisition of Strateq and Hong Kong Broadband Network’s (HKBN)’s ICT assets in Malaysia and Singapore (JOS). The already delisted M1 has also recently purchased Glocomp, a Malaysian digital solutions provider.
“These purchases mark the telcos’ maiden geographical diversification beyond Singapore to capitalise on stronger regional growth opportunities,” says RHB.
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Under its strategic business reset, Singtel is also doubling down on its enterprise aspirations, having crafted a regional strategy to penetrate the Asean B2B market with an expanded suite of ICT offerings under wholly-owned NCS.
With Singtel being RHB’s preferred pick, the research house expects to see a 20.3% growth in Singtel’s FY2022 core earnings after four consecutive years of decline, , supported by a recovery in mobile revenue and stronger contributions from associate, Airtel.
Valuation on the stock is also currently undemanding, at -1SD from its historical EV/EBITDA mean, with catalysts hailing from its strategic business reset announced in May 2021.
Following the earlier disposal of Optus’ tower assets (ATN), Singtel is reported to be weighing the sale of its Australian fibre assets. The group is also open to relinquishing its stake or a partial divestment in its cyber-security outfit, Trustwave.
As at 12.30pm, shares in Singtel are trading at $2.43, with the stock rising by about 6.6% in the past six months. The stock has a FY2022 price-to-book ratio of 1.4 times with a dividend yield of 4.1%.
Photo: Bloomberg
